Navigating the Economic Landscape

Fed Governor Fisher: “Break Up TBTF Banks”

Posted by Larry Doyle on January 17, 2013 11:54 AM |

Three days ago I wrote how strongly I believe that the Wall Street landscape needs to be restructured. How so? I made my case in defining Wall Street as an oligopoly and Why Should the Banks Be Broken Up?

I concluded my commentary by highlighting that Dallas Federal Reserve governor Richard Fisher would be addressing this same topic on Wednesday evening. What did the good governor have to say?

U.S. authorities should break up the country’s largest banks to protect against the risk of institutions that are “too big to fail” and that would saddle ordinary Americans with the cost of a bailout the next time they get into trouble, a senior Federal Reserve official said on Wednesday.

“We recommend that TBTF (too big to fail) financial institutions be restructured into multiple business entities,” Richard Fisher, president of the Dallas Federal Reserve Bank, said in remarks prepared for delivery at the National Press Club in Washington.

Lawmakers passed sweeping changes to financial regulation in the aftermath of the 2007-2009 financial crisis in legislation led by Senator Chris Dodd and Congressman Barney Frank.

But critics say Dodd-Frank did not go far enough, including several Fed officials who, like Fisher, want the biggest banks broken up. Fed Governor Daniel Tarullo argued in October that Congress could think about new laws to cap the size of big banks relative to their share of U.S. gross domestic product.

Fisher, blaming such “behemoth” firms for massive bad bets on the U.S. housing market at the root of the crisis and subsequent taxpayer bank bailout, said the Fed should protect their core commercial lending operations — and nothing else.

He identified 12 “megabanks” with assets of over $250 billion as too big to fail.

“Only the resulting down-sized commercial banking operations, and not shadow banking affiliates or the parent company, would benefit from the safety net of federal deposit insurance and access to the Federal Reserve’s discount window,” he said.

The discount window is an emergency source of liquidity for qualifying banks unwilling or unable to borrow in the open market. They pay a higher rate of interest for the privilege.

Remaining parts of a bank’s business would be excluded from government support, and anyone doing business with them should have to sign an official disclaimer, Fisher said.

Such a health warning would acknowledge that no federal deposit insurance or other public money would come to the rescue if their counterparty hit the rocks.

The 12 “megabanks” Fisher identified together account for 69 percent of all U.S. banking assets, but represent only 0.2 percent of the country’s 5,600 banks.

“The 12 institutions … are candidates to be considered TBTF because of the threat they could pose to the financial system and the economy should one or more of them get into trouble,” he said.

He did not name them all, but showed a slide displaying the names of five top U.S. banks: JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup and Morgan Stanley.

Bank of America, Wells Fargo, and US Bancorp would certainly also fall into this TBTF camp.

By contrast, the country’s 5,500 community banks with assets under $10 billion and the 70-or-so larger regional banks, with assets of $10 billion to $250 billion, pose no such threat, and have indeed been shut by regulators in the past when in trouble.

Arguing that firms deemed too big to fail enjoy a “perverse” subsidy because creditors are prepared to lend them money at a lower rate than smaller, better-regulated and less-risky firms, Fisher said the situation has worsened since the crisis.

He acknowledged that big banks – which give generously to U.S. lawmakers of both parties and have well-funded lobby machines in Washington — would likely not reorganize themselves voluntarily, and he envisaged federal action.

“A subsidy once given is nearly impossible to take away,” Fisher said. “Thus, it appears we may need a push, using as little government intervention as possible to realign incentives, re-establish a competitive landscape and level the playing field.”

BREAK UP THE WALL STREET OLIGOPOLY and LET’S REINTRODUCE FREE MARKET CAPITALISM BACK TO AMERICA!!

I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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Ed Pefferman

Larry,
Your becoming one of those left-wing Keynesian
Socialist….”intervention in the Market”….and
not just a little intervention!!!!!!!
“Why should the Banks be Broken Up?” Begs the question,
By Who? The Courts? The Justice Dept? The Executive?
This current article by Fisher suggests….”…we may
need a push, using as little government intervention as
possible, to realign incentives reestablish competive
landscape and level the playing field”.
Sounds like Socialism to me.
Ed

LD

Ed,

A convenient argument that anybody in favor of the status quo would make. I get that.

Left wing Keynsian socialists? Not at all. I remain a fiscal and social conservative and ardent supporter of the free market.

I see little of any of this when I look at Wall Street and our banking system currently.

As I highlighted the other day, Wall Street currently is nothing more than oligoply supported and backstopped by the government and the Federal Reserve. How do we get Uncle Sam and Uncle Fed out of the markets and out of the system?

Break up the banks.

Then maybe just maybe we can get back to free market capitalism. Do not drink their Kool-Aid, Ed!!

Peter Scannell

LD is a left wing Keynsian socialists?

That made me chuckle Ed, now get back to your work at the bank.

Ed Pefferman

Larry
My comment was sarcastic, your response was a bit defensive.

Ed

LD

Ed,

Haha. You got me hook, line, and sinker. Nicely done.

Ed Pefferman

Peter,
Somebody needs to cheer up Larry, can’t take a joke
anymore.

Ed

Happel

Not going to happen. Who changes the law and who finances their campaigns? And Uncle Warren said they are no longer a threat to the economy. Of course he couldn’t possibly have a vested interest in the industry, could he?

Gamma

I agree with your commentary about the big banks. If I might, can I respectfully suggest that in future commentary you please consider advising/suggesting to readers that they vote economically by choosing to bank with institutions other than the TBTFS.

By your math (69% or so!) a lot of people are using these institutions (even if they don’t want to).

I don’t see the captured regulators doing anything soon, but that does not mean folks can’t take action themselves.

What might also be very useful would be if you could present information about credit-worthy banks or credit unions with decent services (e.g., broad ATM networks; small business loans, etc.) so that people have actionable info about alternatives where their money is (relatively) safe.

Voting with your wallet. The ultimate sense on cents.
THANKS as always.

Eddie

Of course i want free market capitalism but if we keep enabling government to intervene with the force of law ( to govern) where will it stop? We’ve seen: no where.

If these banks broke a “size” law of some kind then yes. It seems we want government to regulate shocks by intervening at the highs and the lows when that only prolongs the negative effects of the highs and lows.

Size isn’t a determinant of success in business, it’s more likely costs and when you’re that big costs are too.

Brian

Fed governor Fisher has clearly made his case: the real disaster isn’t the banks’ asset losses, it’s the de facto ability of TBTF banks to obstruct policy makers’ ability to keep credit flowing. The herd behavior exhibited by the financial industry means that we can expect another financial crisis of the current variety – only worse, since there are now a smaller number of even larger banks that will almost certainly cause another “perfect storm.” Statements to the contrary fail to account for the follow-the-leader mentality of chasing unrealistic returns.